market is dominated by Pakistani imports, which are low cost during surplus years, and

prohibitively expensive during shortfalls (as is the case during 2008). See Section 5. Market
Summary. As a result, during wheat shortages millions of Afghans face starvation. Increasing
domestic production capacity is therefore vital to addressing one of Afghanistan’s most pressing
food security vulnerabilities. The Government of Afghanistan (GoA) recognizes this reality, and
ZFM plans to seek GoA support once suitable private sector partners are engaged.
ZFM will further assist job-creation by stimulating additional wheat production. Many of the
country’s poor have access to arable land fit for wheat production, but do not exploit these
opportunities due to the absence of reliable purchasers for their crops. ZFM will be a consistent
and reliable purchaser of wheat, and will pay producers competitive market prices, thereby
incentivizing more growers to produce wheat. Local and regional growers are expected to have
the greatest incentives since they will enjoy the lowest transportation costs for supplying ZFM.
ZGB will also leverage its existing relationships with the PRT network in Paktiya province. A new
PRT Agribusiness Development Team is scheduled to be operational in Paktiya by March 2009.
Significant local community support, strong district government support and very proactive
provincial government support is expected for ZFM as food security, employment opportunity
and a reliable buyer for surplus wheat will improve the quality of life for the surrounding
communities. ZFM is expected to create spin-off gains in the agricultural sector by incentivizing
farmers to grow wheat. Farmers will be more likely to stick with wheat as one of their main crops,
and those currently growing illicit cash crops will be encouraged to shift production to wheat as
local market demand (led by ZFM) becomes more established.
3. Economic and Environmental Trends
3.1 Rising Food Prices

World Wheat Prices

2002 2003 2004 2005 2006 2007

Price (US$) 118.53 116.62 125.19 121.65 153.00 203.66
Variation (%) -1.61 7.35 -2.83 25.77 33.11
Over the past 12 months global market prices for wheat have nearly doubled. There are many
reasons for this increase, including higher demand for cereals in some parts of the world,
particularly in Asia, China and India; conversion and use of some grains for bio-fuels; and a poor
2007 harvest in a few regions of the world that have traditionally had very strong wheat
production.
The strengthening in world commodity prices that became so pronounced in late 2007 and early
2008 may prove to be a new phase in world markets. Local food production can help buffer the
region against turbulence in world markets by providing an alternative to expensive imports. High
prices will provide the incentives that the agriculture sector needs to increase production, which
will ultimately help reduce regional food prices. Agriculture, however, has been neglected in
recent decades and will take some time to rebuild. The surge in food prices highlights the
importance of ending this neglect and paying more attention to the rural economy.
In the local areas of Paktiya province, increased prices in fuel oil, record high wheat prices,
political instability and border closures with Pakistan, and voluntary and involuntary refugee
returns have the potential to lead to increased dissatisfaction with the GoA, growing food
insecurity and malnutrition, and in extreme cases, food-induced displacement within the local
and nearby provinces of Afghanistan. As these factors converge, there becomes a direct
correlation with rapid price increases, escalating demand and shortages of supplies relating to
wheat and wheat flour in Afghanistan.
3.2 Economic Environment
There are approximately one million farms in Afghanistan and more than 2,000 wholesalers for
horticulture products. Intensive commercial farming will increase sustainable economic growth in
rural areas, areas, encourage competition, contribute to regional development and help sustain
the growth of spin-off businesses. Investment in agribusiness and agriprocessing will have a
positive impact on the economic development of Afghanistan and will instill in Afghans pride that
comes from producing and purchasing local Afghan food products. The ultimate goal for a
modern agricultural sector in Afghanistan is to achieve sustainable production for both domestic
consumption and export. ZFM will be in a position to become Afghanistan’s sunrise industry, an
emerging growth industry that will be a strong sector in the future.
3.3 Environmental Concerns
Currently, winter grain growing conditions in much of Afghanistan are significantly worse than
last year, due to prolonged drought and low winter snowfall. The Famine Early Warning System
(FEWS NET) reported in March 2008 that much of Afghanistan received 50-90% less precipitation
and that both rain fed and irrigated crops would be seriously affected. Afghanistan has a total of
approximately 3 million hectares in production, half under irrigation and the other half rain-fed.
Field surveys in late spring indicated that approximately 80% of the nation’s rain-fed wheat crop
and 30% of its irrigated crop have been lost due to severe dryness. The irrigated wheat crop relies
extensively on snowmelt for irrigation supply, and in normal years, accounts for roughly 80% of
total wheat production. Winter wheat planting normally occurs between mid-September and
mid-November, while harvest typically occurs from June through September. These factors may
reduce the 2008/09 local wheat harvest, resulting in a greater Afghan reliance on imported
wheat.
4. Industry Overview
4.1 Background
Annual per capita wheat consumption in Afghanistan is 160 Kg, among the highest in the world.
Chronic food insecurity, most pronounced in the central highlands and northwestern parts of
Afghanistan, has been exacerbated by continued increases in cereal prices across the country
(especially in urban areas), and a below-normal 2007/08 wet season that will negatively affect
pastures and the upcoming harvest (May through August). In a typical year, Afghanistan cannot
meet its total cereal requirements through domestic production, leaving it dependent on food
aid, as well as cereal imports from Pakistan, Kazakhstan, Uzbekistan, and Iran. Given anticipated
below-normal wheat harvests in much of Central Asia this year (which are likely to impact the
amount of wheat supplied to Afghanistan from within the region), and high global cereal prices,
food insecurity is certain to increase in the absence of prompt and significant interventions.
These interventions could include food aid (with a strong emphasis on improved targeting both at
the geographic and household level), bilateral cereal trade agreements between countries within
the region, activities to strengthen households’ purchasing power, the continued withholding of
import duties on wheat/flour, and subsidized fuel and other transport costs.
Afghanistan also has a severe shortage of wheat milling capacity, which has created a market for
surplus flour from Pakistan. Grain storage, marketing, milling, baking and processing
infrastructure are all grossly inadequate. Development of these capacities will strongly encourage
local wheat production while reducing Afghanistan’s dependency on flour imports and
international food assistance. The Afghanistan commercial flour market is dominated by Pakistan
to the extent that flour is priced and sold in Pakistan rupees. Even so, Pakistani surplus flour is not
available on a regular basis, and quality is not consistent. Therefore flour milling and grain storage
requirements of Afghanistan are issues of national food security. There are only eight
commercial-sized mills operating in Afghanistan, none of which are in Paktiya, Paktika, Ghazni,
Logar or Khost provinces.
In Loya Paktiya, most wheat is planted in October-November and harvested th